3. Comparison of Profitability

The purpose of cost centre analysis is to identify the
contribution of different sources of income within the business to
the overall business's profit or loss. Although referred to as
'cost centres' it is worth noting that these parts of the business
are not just costs and they also generate income. All inputs and
outputs have been counted against one of five cost centres:
agricultural; agri-environment (land management to support
environmental objectives); diversification; agricultural
contracting (off-farm use of farm business resources); and income
from the direct payments scheme (costs could be incurred against
this centre if, for example, accountants are hired to manage
claims).

Figure 6 below shows the overall average income from each cost
centre in 2014-15 and 2015-16. In both years, losses were
accumulated against farming activity (the agricultural cost
centre).

The average loss from agricultural farming activities increased
in 2015-16 to £31,100. This loss from agricultural activities
was offset by income from diversification, contracting and
agri-environment activities. However, the profitability of the
average Scottish farm business in the
FBS is heavily
reliant on income from the Direct Payment Schemes.

Figure 6: Farm Business Income by cost centre

The average income to Scottish farm businesses in the survey
from direct payments was £30,000 in 2015-16, a decrease of
five per cent on the previous year. There was an eight per cent
decrease in the value derived from agri-environment schemes to an
average of £7,800. Contracting increased two per cent in the
latest year, with this activity generating an average of
£3,100. Diversified activities generated £2,800 on
average, a 19 per cent increase since 2014-15. Despite the low
average income from diversified activities, farms engaged in such
activities reported notably higher incomes than non-diversified
farms on average.

Some farms receive additional income from diversified activities
and figure 7 shows the main activities undertaken and the average
income from each in 2015-16. Of farms engaged in diversified
activities, the overall average income from such activities was
£4,400. The most common diversified activity was renting out
buildings for uses other than tourist accommodation which accounted
for 46 per cent of activities. Processing and retailing of farm
produce was the activity that generated the greatest income, with
an average income of £24,200.

Figure 7: Average income from diversified activities in
2015-16

The largest increase in number of activities in the sample was
seen in micro electric generation, which includes renewable energy
other than wind turbines (
e.g. solar panels, biomass
boilers and hydro-electric). However, micro electric generation was
the only activity to make a loss, with the average loss of income
being £1,900. Losses in this category have reduced since
2014-15 due to a fall in start-up costs as well as depreciation
costs.

The unmatched sample shows that average income from diversified
activities had increased by 32 per cent in the last year. The only
two types of diversified activity which had a decrease in income
from 2014-15 were renting out buildings for uses other than tourist
accommodation and mobile phone masts, which decreased by one per
cent and ten per cent respectively.

Figure 8 shows, from a five year matched sample (comparing the
same farms each year), the average
FBI of those farms
engaged in any diversified activity and those with no diversified
activities. Diversification is assessed over, at most, a five-year
period to allow for a reasonable matched sample size. Note that the
matched sample is un-weighted and therefore describes sample
averages only.

Figure 8: Comparison of average income of farms with and
without diversified activities

The average difference in
FBI between
diversified and non-diversified farms was around £11,000.
Average
FBI for farms
engaged in diversified activities was £22,800, which was 34
per cent lower than the previous year, while the average income on
non-diversified farms has fallen by 51 per cent to
£11,800.

From farms engaged in diversified activity in the matched
sample, the average income from the diversified activities in
2015-16 was £6,700, a 33 per cent increase from the previous
year.